International Media Watch of news headlines and current affairs reports about Romania

Wednesday, May 4, 2011

FT: Romania: betting on the leu

by Stefan Wagstyl

Romania’s central bank on Tuesday left its key interest rate unchanged at 6.25 per cent, even though policymakers in emerging markets are generally raising rates to curb inflation.

With rates already the highest in the European Union, the National Bank of Romania doesn’t want to risk harming the country’s fragile economic recovery. It’s betting that a surge in the leu will ease inflationary pressures enough to justify its approach. Given Romania’s high-inflation history, it’s a risky strategy.

The central bank stopped cutting interest rates last summer after successive cuts which reduced official rates to their lowest level since 1989. But even though economic growth remains anaemic, with economists forecasting an increase in GDP of juist 1-1.5 per cent in 2011. the inflation rate has risen fast – to 8 percent in March from 7.6 percent in the month before, which is way above the central bank’s 2-4 per cent target range.

With global food and energy price rises driving inflation, policymakers – like their counterparts elsewhere – hope that there could be a respite in the second half of 2011 if commodity prices stabilise, even at the present high levels. The NBR will publish its latest views later this week on May 5.

Citigroup said in a report on Tuesday:

Due to rising risks on the inflation front and the deterioration in forward-looking expectations, we think that the NBR is more likely to keep rates on hold at 6.25% in 2011. This view is also supported by the recent statements of senior NBR officials who underlined that inflationary risks are bigger than initially envisaged.

In the meantime, the pressure on Romania has been relieved by the sharp increase in the leu – up 2.5 per cent against the euro since December 2010. But currency appreciation hasn’t stopped other countries in the region – notably Russia – from raising rates.

With the Bucharest stock market up 10 per cent this year, compared to an average of 2.5 per cent for emerging markets, investors are clearly betting that the Bucharest authorities will get things right. There is some trust in the government’s capacity to stick with fiscal discipline and in forecasts of a sharp GDP growth recovery to around 4 per cent in 2012. But the international enviroment is not easy for a smallish state on the EU’s periphery.